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Exhibit 99.1
NEWS RELEASE
CONTACT: Patrick Scanlon, Senior Vice President, Controller
Penseco Financial Services Corporation
(570) 346-7741
FOR RELEASE: 4:00 P.M. Eastern Time: October 31, 2008
PENSECO FINANCIAL SERVICES CORPORATION REPORTS 3RD QUARTER 2008 EARNINGS
SCRANTON, PA, October 31, 2008 -- Penseco Financial Services
Corporation (OTC Bulletin Board: PFNS), the Scranton, Pennsylvania based
financial holding company of Penn Security Bank & Trust Company, reported an
increase in net income of $61,000 or 2.8% for the three months ended September
30, 2008 to $2,242,000 or $1.04 per share compared with $2,181,000 or $1.01 per
share from the year ago period. The increase in net income was primarily
attributable to increased net interest income of $298,000 or 5.4% and higher
non-interest income offset by higher non-interest expense. Interest on
investments increased mainly due to purchases of securities of states &
political subdivisions and U.S. Agencies while total interest expense declined
mainly from lower deposit costs. The provision for loan losses decreased
$141,000 from the year ago period. The allowance for loan losses at September
30, 2008 was 1.21% of total loans compared to 1.22% of total loans at June 30,
2008 and 1.16% total loans at September 30, 2007.
For the nine months ended September 30, 2008, net income increased $1,576,000 or
28.4%, to $7,127,000 or $3.32 per share compared with the year ago period of
$5,551,000 or $2.58 per share. The increase in net income was primarily
attributable to a one time after tax increase in income of $1,129,000 ($.53 per
share) related to VISA, Inc.'s Initial Public Offering, which consisted of a
gain from the mandatory partial share redemption by VISA and the reversal of a
litigation liability accrual that had been recorded by the Company in the fourth
quarter of 2007. Excluding the impact of the VISA transaction, net income
increased $447,000 or 8.1% from the first nine months of 2007(1). Net interest
income increased $955,000 or 5.9% to $17,072,000 for the nine months ended
September 30, 2008 compared to $16,117,000 for the same period of 2007. The
increase resulted from higher interest on investments of $425,000 or 7.9% due to
purchases of securities of states & political subdivisions and U.S. Agencies.
Total interest expense declined mainly due to lower deposit costs. Net interest
income after provision for loan losses increased $865,000 or 5.5%. Year to date
the provision for loan losses increased $90,000 from the year ago period.
NON-INTEREST INCOME
Total non-interest income increased $323,000 or 12.1% to $2,986,000 for the
three months ended September 30, 2008, compared with $2,663,000 for the same
period in 2007. Trust department income decreased $35,000 or 8.3% due to the
decrease in market value of trust assets. Service charges on deposit accounts
increased $158,000 or 64.5% primarily due to the increased number of
accounts and increased service charge activity. Merchant transaction income
increased $101,000 or 6.8% due to higher transaction volume and new business.
Other fee income increased $69,000 or 16.7% from prior year levels mostly due to
increases in brokerage income of $47,000. Realized gains (losses) on securities
increased $25,000 to $23,000 from ($2,000) for the same period of 2007, due to
the sale of equity securities and mortgage-backed securities.
Total non-interest income increased $2,229,000 or 33.1% to $8,968,000 during the
first nine months of 2008 from $6,739,000 for the same period of 2007. Service
charges on deposit accounts increased $306,000 or 40.5% primarily due to the
increased number of accounts and increased service charge activity. Merchant
transaction income increased $300,000 or 8.8%, mainly due to higher transaction
volume and new business. Other fee income increased $383,000 or 35.9% mainly
from increased brokerage fee income of $326,000 compared to last year. Other
operating income increased $79,000 or 114.5% due to increased income on other
real estate owned of $49,000, along with an increase in general operating
income. The Company realized a gain of $1,213,000 related to VISA, Inc.'s
Initial Public Offering, which consisted of a mandatory partial share
redemption, during the first quarter of 2008, discussed earlier. Realized gains
(losses) on securities decreased $26,000 or 53.1% to $23,000 during the first
nine months of 2008 from $49,000 for the same period of 2007.
- --------------------------
1 See pages 8 and 9 for a reconciliation of GAAP net income to net
income excluding the gain related to the VISA, Inc. initial public offering
during the nine months ended Sepember 30, 2008.
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NON-INTEREST EXPENSES
Total non-interest expenses increased $726,000 or 14.2% to $5,826,000 for the
three months ended September 30, 2008 compared with $5,100,000 for the same
period of 2007. Salaries and employee benefits expense increased $373,000 or
17.7% aided by a $210,000 rebate of health insurance premiums during the third
quarter of 2007, along with current quarter increases in salaries and
commissions resulting from additional employee hires and increased wealth
management revenue. Other operating expenses increased $299,000 or 24.2% aided
by a $139,000 rebate of computer processing fees during the third quarter of
2007, along with current quarter increases in professional services of $124,000,
brokered money market administrative fees of $25,000 and stationery and supplies
of $25,000.
Total non-interest expenses increased $898,000 or 5.8% to $16,341,000 during the
nine months of 2008 compared with $15,443,000 for the same period of 2007.
Salaries and employee benefits expense increased $592,000 or 8.7% mainly due to
increased salaries resulting from additional employee hires, along with
increased commissions of $246,000 related to our wealth management division.
Premises and fixed assets expense increased $106,000 or 5.4% due to computer
system upgrades and increased occupancy expense. Merchant transaction expenses
increased $143,000 or 5.4% due to higher transaction volume. Other operating
expenses increased $57,000 or 1.4% due to increases in professional services of
$285,000, contributions of $91,000, stationery and supplies of $51,000 and
general operating expenses, offset by the reversal in the first quarter of 2008
of the $497,000 VISA litigation accrual recorded by the Company in the fourth
quarter of 2007. Without the impact of the VISA reversal, total non-interest
expenses would have increased $1,395,000 or 9.0%(2).
ASSET QUALITY
The allowance for loan losses at September 30, 2008 was $5,240,000 or 1.21% of
total loans compared to $4,600,000 or 1.16% of total loans at September 30,
2007. Management believes the loan loss reserve is adequate.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,352,000 at September 30, 2008, up from $406,000 at September 30, 2007. If
interest on those loans had been accrued, such income would have been $186,000
and $253,000 for the nine months ended September 30, 2008 and September 30,
2007, respectively. There were no commitments to lend additional funds to
individuals whose loans are in non-accrual status.
Net loan charge-offs amounted to $67,000 or .016% of average outstanding loans
for the three months ended September 30, 2008 compared to $28,000 or .007% at
September 30, 2007. Net loan charge-offs amounted to $78,000 or .019% of average
outstanding loans for the nine months ended September 30, 2008 compared to
$128,000 or .034% at September 30, 2007.
As of September 30, 2008 there are no significant loans as to which management
has serious doubt about their collectibility. During the second quarter of 2008,
the Company was notified that The Education Resources Institute, Inc. (TERI), a
guarantor of a portion of our student loan portfolio, had filed for
Reorganization under Chapter 11 of the Bankruptcy Act. Currently, the Company
holds $8.4 million of TERI loans out of a total student loan portfolio of $20.7
million. The Company does not anticipate that TERI's bankruptcy filing will
significantly impact the Company's financial statements. These loans are placed
on non-accrual status when they become more than 90 days past due. At September
30, 2008 there was $128,000 in such loans placed on non-accrual status,
essentially unchanged from June 30, 2008.
At September 30, 2008 and December 31, 2007, the Company did not have any loans
specifically classified as impaired.
The Company does not engage in any sub-prime or Alt-A credit lending. Therefore,
the Company is not subject to any credit risks associated with such loans. The
Company's lending is primarily residential and commercial secured mortgage
loans, in Northeastern Pennsylvania, based upon conservative underwriting
standards.
- --------------------------
2 See pages 8 and 9 for a reconciliation of GAAP net income to net
income excluding the gain related to the VISA, Inc. initial public offering
during the nine months ended Sepember 30, 2008.
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INCOME TAX EXPENSE
Applicable income taxes decreased $25,000 or 4.1% to $579,000 for the three
months ended September 30, 2008 from $604,000 for the same period of 2007 due to
more tax-free income included in overall operating income. Also, applicable
income taxes increased $620,000 or 46.5% during the first nine months of 2008
primarily due to the income on the VISA initial public offering and overall
higher income.
<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
FINANCIAL HIGHLIGHTS
(unaudited) (in thousands, except per share amounts)
Nine Months Ended
September September
30, 30,
------------------------- Increase %
(in thousands, except per share amounts 2008 2007 $ Change
- -------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on Average Assets 1.55% 1.27% 22.05%
Return on Average Equity 13.14% 10.86% 20.99%
STOCKHOLDERS' VALUE
Net Income $ 7,127 $ 5,551 $ 1,576 28.39%
Earnings per share 3.32 2.58 0.74 28.68%
Dividends Per Share 1.24 1.11 0.13 11.71%
Book Value Per Share 33.48 32.45 1.03 3.17%
Market Value Per Share 39.50 37.50 2.00 5.33%
Market Value/Book Value Ratio 117.98% 115.56% 2.09%
Price Earnings Multiple 8.92x 10.90x -18.17%
Dividend Payout Ratio 37.35% 43.02% -13.18%
Dividend Yield 4.20% 3.95% 6.33%
SAFETY AND SOUNDNESS
Stockholders' Equity/Assets Ratio 11.24% 11.82% -4.91%
Total Capital/Risk Weighted Assets 19.80% 19.99% -0.95%
Tier 1 Capital/Risk Weighted Assets 18.55% 18.76% -1.12%
Tier 1 Capital/Average Assets 12.20% 12.01% 1.58%
Allowance for Loan Loss
a Percent of Loans 1.21% 1.16% 4.31%
Non-accrual Loans/Total Loans 0.31% 0.10% 210.00%
Non-performing Assets/Total Assets 0.21% 0.07% 200.00%
BALANCE SHEET HIGHLIGHTS
Total Assets $639,642 $589,805 $ 49,837 8.45%
Total Investments 154,553 142,191 12,362 8.69%
Net Loans 427,740 391,435 36,305 9.27%
Allowance for Loan Losses 5,240 4,600 640 13.91%
Total Deposits 442,522 423,432 19,090 4.51%
Stockholders' Equity 71,914 69,694 2,220 3.19%
</Table>
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited) (in thousands, except per share amounts)
September 30, September 30,
2008 2007
------------- -------------
ASSETS
Cash and due from banks $ 7,457 $ 12,358
Interest bearing balances with banks 19,325 13,063
Federal funds sold 5,000 7,000
------------- -------------
Cash and Cash Equivalents 31,782 32,421
Investment securities:
Available-for-sale, at fair value 91,029 72,804
Held-to-maturity (fair value of
$64,427 and $70,798, respectively) 63,524 69,387
------------- -------------
Total Investment Securities 154,553 142,191
Loans, net of unearned income 432,980 396,035
Less: Allowance for loan losses 5,240 4,600
------------- -------------
Loans, Net 427,740 391,435
Bank premises and equipment 9,175 9,489
Other real estate owned - -
Accrued interest receivable 3,606 3,632
Cash surrender value of life insurance 7,605 7,289
Other assets 5,181 3,348
------------- -------------
Total Assets $639,642 $589,805
============= =============
LIABILITIES
Deposits:
Non-interest bearing 80,944 78,187
Interest bearing 361,578 345,245
------------- -------------
Total Deposits 442,522 423,432
Other borrowed funds:
Repurchase agreements 45,857 33,295
Short-term borrowings 572 625
Long-term borrowings 75,275 58,470
Accrued interest payable 1,090 1,386
Other liabilities 2,412 2,903
------------- -------------
Total Liabilities 567,728 520,111
------------- -------------
STOCKHOLDERS' EQUITY
Common stock ($ .01 par value,
15,000,000 shares authorized,
2,148,000 shares issued and
outstanding) 21 21
Surplus 10,819 10,819
Retained earnings 64,160 59,560
Accumulated other comprehensive income (3,086) (706)
------------- -------------
Total Stockholders' Equity 71,914 69,694
------------- -------------
Total Liabilities and Stockholders'
Equity $639,642 $589,805
============= =============
</Table>
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) (in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------
2008 2007 2008 2007
-------- --------- --------- ---------
INTEREST INCOME
Interest and fees on loans $6,543 $6,769 $19,640 $19,621
Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 1,047 896 3,052 2,859
States & political subdivisions 849 733 2,521 2,178
Other securities 68 84 211 322
Interest on Federal funds sold 31 129 31 433
Interest on balances with banks 28 121 62 314
-------- --------- --------- ---------
Total Interest Income 8,566 8,732 25,517 25,727
-------- --------- --------- ---------
INTEREST EXPENSE
Interest on time deposits of $100,000
or more 336 504 1,142 1,540
Interest on other deposits 1,385 1,858 4,342 5,585
Interest on other borrowed funds 1,017 840 2,961 2,485
-------- --------- --------- ---------
Total Interest Expense 2,738 3,202 8,445 9,610
-------- --------- --------- ---------
Net Interest Income 5,828 5,530 17,072 16,117
Provision for loan losses 167 308 618 528
-------- --------- --------- ---------
Net Interest Income After Provision
for Loan Losses 5,661 5,222 16,454 15,589
-------- --------- --------- ---------
NON-INTEREST INCOME
Trust department income 386 421 1,133 1,160
Service charges on deposit accounts 403 245 1,062 756
Merchant transaction income 1,583 1,482 3,702 3,402
Other fee income 483 414 1,451 1,068
Bank-owned life insurance income 78 80 236 235
Other operating income 30 23 148 69
VISA mandatory share redemption - - 1,213 -
Realized (losses) gains on securities,
net 23 (2) 23 49
-------- --------- --------- ---------
Total Non-Interest Income 2,986 2,663 8,968 6,739
-------- --------- --------- ---------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,481 2,108 7,405 6,813
Expense of premises and equipment, net 626 605 2,061 1,955
Merchant transaction expenses 1,182 1,149 2,787 2,644
Other operating expenses 1,537 1,238 4,088 4,031
-------- --------- --------- ---------
Total Non-Interest Expenses 5,826 5,100 16,341 15,443
-------- --------- --------- ---------
Income before income taxes 2,821 2,785 9,081 6,885
Applicable income taxes 579 604 1,954 1,334
-------- --------- --------- ---------
Net Income $2,242 $2,181 $7,127 $5,551
======== ========= ========= =========
Earnings per Common Share
(Based on 2,148,000 shares $ 1.04 $ 1.01 $ 3.32 $ 2.58
outstanding)
Cash Dividends Declared Per Common Share 0.42 0.37 1.24 1.11
</Table>
Penseco Financial Services Corporation, through its subsidiary Penn Security
Bank & Trust Company, operates nine offices in Lackawanna, Wayne and Monroe
counties. The Company's stock is traded on the OTC Bulletin Board Market, under
the symbol, "PFNS".
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This press release, as well as other written communications made from time to
time by the Company and its subsidiaries and oral communications made from time
to time by authorized officers of the Company, may contain statements relating
to the future results of the Company (including certain projections and business
trends) that are considered "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 (the "PSLRA"). Such
forward-looking statements may be identified by the use of such words as
"believe," "expect," "anticipate," "should," "planned," "estimated," "intend"
and "potential". For these statements, the Company claims the protection of the
safe harbor for forward-looking statements contained in the PSLRA.
The Company cautions you that a number of important factors could cause actual
results to differ materially from those currently anticipated in any
forward-looking statement. Such factors include, but are not limited to:
prevailing economic and geopolitical conditions; changes in interest rates, loan
demand, real estate values and competition; changes in accounting principles,
policies, and guidelines; changes in any applicable law, rule, regulation or
practice with respect to tax or legal issues; and other economic, competitive,
governmental, regulatory and technological factors affecting the Company's
operations, pricing, products and services and other factors that may be
described in the Company's Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q as filed with the Securities and Exchange Commission. The
forward-looking statements are made as of the date of this release, and, except
as may be required by applicable law or regulation, the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
NON-GAAP FINANCIAL MEASURES: (VISA TRANSACTION)
Certain financial measures contained in the 10-Q exclude the decrease of the
liability accrual related to VISA's covered litigation provision as well as the
gain from the mandatory redemption of a portion of the Company's class B shares
in VISA. Financial measures which exclude the above-referenced items have not
been determined in accordance with generally accepted accounting principles and
are therefore non-GAAP financial measures. Management of the Company believes
that investors' understanding of the Company's performance is enhanced by
disclosing these non-GAAP financial measures as a reasonable basis for
comparison of the Company's ongoing results of operations. These non-GAAP
measures should not be considered a substitute for GAAP-basis measures and
results. Our non-GAAP measures may not be comparable to non-GAAP measures of
other companies. The attached Non-GAAP Reconciliation Schedule provides a
reconciliation of these non-GAAP financial measures to the most closely
analogous measure determined in accordance with GAAP.
In March 2008, VISA, Inc. (VISA) completed its initial public offering. Penn
Security Bank & Trust Company and certain other VISA member banks are
shareholders in VISA. Following the initial public offering, the Company
received $1.2 million in proceeds from the offering, as a mandatory partial
redemption of 28,351 shares, reducing the Company's holdings from 73,333 to
44,982 shares of Class B common stock. Using proceeds from this offering, VISA
established a $3.0 billion escrow account to cover the resolution of pending
litigation and related claims. The partial redemption proceeds of $1.2 million
are reflected in other non-interest income in the first quarter of 2008.
The remaining unredeemed shares of VISA Class B common stock are restricted and
may not be transferred until the later of (1) three years from the date of the
initial public offering or (2) the period of time necessary to resolve the
covered litigation. A conversion ratio of 0.71429 was established for the
conversion rate of Class B shares into Class A shares. If the funds in the
escrow account are insufficient to settle all the covered litigation, VISA may
sell additional Class A shares, use the proceeds to settle litigation, and
further reduce the conversion ratio. If funds remain in the escrow account after
all litigation is settled, the Class B conversion ratio will be increased to
reflect that surplus. As of September 30, 2008, the value of the Class A shares
was $61.39 per share. The value of unredeemed Class A equivalent shares owned by
the Company was $2.0 million as of September 30, 2008, and has not yet been
reflected in the accompanying financial statements.
In connection with VISA's establishment of the litigation escrow account, the
Company reversed a $497,000 reserve in the first quarter of 2008, reflected as a
reduction of other non-interest expense. This reserve was created in the fourth
quarter of 2007, pending completion of the VISA, Inc. initial public offering as
a charge to other non-interest expense.
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<Table>
<Caption>
NON-GAAP RECONCILIATION SCHEDULE
PENSECO FINANCIAL SERVICES CORPORATION
(UNAUDITED)
(IN THOUSANDS)
The following tables present the reconciliation of non-GAAP financial measures
to reported GAAP financial measures.
Nine Months Ended
September 30,
2008 2007 Change
--------------- -------------- ----------------
Net interest income after
provision for loan losses $ 16,454 $ 15,589 $ 865
Non-interest income 8,968 6,739 2,229
Non-interest expense (16,341) (15,443) (898)
Income tax provision (1,954) (1,334) (620)
--------------- -------------- ----------------
Net income 7,127 5,551 1,576
Adjustments
Non-interest income Gain on
mandatory redemption of VISA, Inc.
class B common stock (1,213) - (1,213)
Non-interest expense
Covered litigation
provision (497) - (497)
--------------- -------------- ----------------
Total Adjustments pre-tax (1,710) - (1,710)
Income tax provision 581 - 581
--------------- -------------- ----------------
After tax adjustments to (1,129) - (1,129)
--------------- -------------- ----------------
Adjusted net income $ 5,998 $ 5,551 $ 447
=============== ============== ================
Return on Average Assets 1.30% 1.27%
Return on Average Equity 11.05% 10.86%
</Table>
Return on average equity (ROE) and return on average assets (ROA) for the nine
months ended September 30, 2008 was 13.14% (11.05% excluding the VISA IPO
impact) and 1.55% (1.30% excluding the VISA IPO impact), respectively. ROE was
10.86% and ROA was 1.27% for the same period last year.